Over-Allocation or Abatement? A Preliminary Analysis of the
EU ETS Based on the 2005-2006 Emissions Data
A. Denny Ellerman Barbara K. Buchner
2007
RPP-2007-03
Regulatory Policy Program
Mossavar-Rahmani Center for Business and Government John F. Kennedy School of Government
79 John F. Kennedy Street, Weil Hall Cambridge, MA 02138
CITATION This paper may be cited as: Ellerman, A. Denny and Barbara K. Buchner. 2007. “Over-Allocation or Abatement? A Preliminary Analysis of the EU ETS Based on the 2005-06 Emissions Data,” Regulatory Policy Program Working Paper RPP-2007-03. Cambridge, MA: Mossavar-Rahmani Center for Business and Government, John F. Kennedy School of Government, Harvard University. Comments may be directed to the authors.
REGULATORY POLICY PROGRAM The Regulatory Policy Program at the Mossavar-Rahmani Center for Business and Government provides an environment in which to develop and test leading ideas on regulation and regulatory institutions. RPP’s research aims to improve the global society and economy by understanding the impacts of regulation and creating better decisions about the design and implementation of regulatory strategies around the world. RPP’s efforts are organized around the following three core areas: regulation, markets, and deregulation; regulatory instruments; and regulatory institutions and policymaking. The views expressed in this paper are those of the authors and do not imply endorsement by the Regulatory Policy Program, the Mossavar-Rahmani Center for Business and Government, the John F. Kennedy School of Government, or Harvard University.
FOR FURTHER INFORMATION Further information on the Regulatory Policy Program can be obtained from the Program's director, Jennifer Nash, Mossavar-Rahmani Center for Business and Government, John F. Kennedy School of Government, 79 JKF Street, Cambridge, MA 02138, telephone (617) 384-7325, telefax (617) 496-0063, email [email protected]. The homepage for the Regulatory Policy Program can be found at: http://www.ksg.harvard.edu/m-rcbg/rpp/index.html
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Over-Allocation Or Abatement? A Preliminary Analysis of the EU
ETS Based on the 2005-06 Emissions Data
A. Denny Ellermana and Barbara K. Buchnerb*
a Massachusetts Institute of Technology (MIT), Sloan School of Management, Cambridge, MA, USA
b International Energy Agency (IEA), Paris, FRANCE
(during the preparation of this paper Barbara K. Buchner was Senior Researcher at the Fondazione Eni Enrico
Mattei and a visitor at MIT)
Abstract
This paper provides an initial analysis of the EU ETS based on the installation-level data
for verified emissions and allowance allocations in the first two years of the first trading
period. These data reveal that CO2 emissions were about 3% lower than the allocated
allowances. The main objective of the paper is to shed light on the extent to which over-
allocation and abatement have taken place in 2005 and 2006, when a significant CO2 price
was observed. We propose a measure by which over-allocation can be judged and provide
estimates of abatement based on emissions data and indicators of economic activity as well
as trends in energy and carbon intensity. Finally, we discuss the insights and implications
that emerge from this tentative assessment.
Keywords: Climate policy; European Union Emissions Trading Scheme; Data analysis
JEL Classification: C81, H41, O13, Q54, Q58
*Corresponding author: Barbara K. Buchner, International Energy Agency, Energy
Efficiency and Environment Division, 9 rue de la Fédération, 75015 Paris, Tel:
+33.(0)1.4057.6687, Fax: +33.(0)1.4057.6739, e-mail: [email protected]
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1 Introduction
The release of installation-level data for verified emissions and allowance allocations for
the first two years of the trial period for the European Union’s CO2 Emissions Trading
Scheme (EU ETS) revealed that CO2 emissions were on average about 60 million tonnes or
3% lower than the number of allowances distributed to installations for these years. This
long position has been interpreted as evidence of over-allocation, something that had been
suspected but which seemed belied by the higher than expected prices that had prevailed
before the first releases of these data in April 2006. While over-allocation cannot be
dismissed as a possibility, a long position is not per se evidence of over-allocation.
Installations that had abated in order to sell allowances or to bank them for use in later
years would appear in these data as long. In fact, it would be impossible based on a simple
comparison of allocations and emissions at the installation level to determine whether a
long position indicated over-allocation or abatement. Hence, the question posed by the title
of this paper.
The rest of the paper is organized in four sections. The first presents and comments on
the 2005 and 2006 data as well as the price movements associated with the release of these
data. Although a full discussion of European Union Allowance (EUA) pricing is beyond the
scope of this paper, an understanding of the evolution of EUA prices bears on any
discussion of over-allocation and abatement. The next section addresses over-allocation and
proposes a measure by which over-allocation can be judged. Then, we turn to abatement
and provide some estimates of abatement based on the 2005-06 emissions data and
economy-level indicators of economic activity and trends in energy and carbon intensity.
The last section concludes.
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2 The 2005-06 data and EUA prices
Table 1 provides the average annual installation-level data for 2005 and 2006 aggregated
by member states ordered by the size of the annual allocation. The last two columns
indicate the extent to which the installations in each member state are as a whole either long
or short both in absolute and percentage terms.
<INSERT TABLE 1>
A number of comments need to be made concerning these data. First, these first two
years provide a good indication of what will be the final position of the EU ETS at the end
of the three-year “trial period.” At levels of aggregation significantly above the installation
level, such as member states or sectors, 2006 looked a lot like 2005. For the EU ETS as a
whole, emissions were a little higher in 2006 than in 2005 and the annual allocation a little
lower (since some countries front-ended their three-year allocations). Given continuing
economic growth and a near-zero price for carbon during most of 2007, it is reasonable to
assume that the three-year average will reveal a net position that is not as long as what is
shown by the 2005-06 data; however, the main features of the country and sector positions
are not likely to be much different.
Second, the allowance totals for member states reflect the allowances distributed to
installations in 2005 and 2006 as recorded in the Community Independent Transaction Log
(CITL).1 This is not the annual average of all allowances that will be distributed during
2005-07 according to the National Allocation Plans. European Union Allowances (EUAs)
1 Corrections and additions are often made but their effect on the aggregates reported here is small. The data in our analysis are the CITL data updated through September, 2007.
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reserved for new entrants, auctions, or early action awards are not included and in many
cases these reserves have not yet been released.
Third, and finally, these data do not indicate the amount of purchases and sales made by
specific facilities, although they do have implications for trading patterns. Installations that
are shown to be short, that is, with emissions greater than the EUA allocation, can be
presumed to have purchased or otherwise acquired EUAs from other installations (or from
their own forward endowments)2 to be in compliance. Conversely, installations that are
revealed to be long would have EUAs that could be sold, but that doesn’t mean that they
were made available to the market or transferred to another facility having common
ownership.
The first release of verified emissions data had a marked effect on EUA prices, as shown
by the sharp break in the price of all maturities of EUAs that can be observed in late April
2006 depicted on Figure 1. Following announcements by the Netherlands and the Czech
Republic on Tuesday, April 25 that their emissions were 7% and 15% below the respective
allocations to installations, EUA prices fell by about 10%. Subsequent announcements from
the Walloon region of Belgium, France, and Spain revealing similarly long positions for the
first two and a smaller than expected shortage in Spain led to a closing spot price on Friday
April 28 of € 13.35, 54% below the closing spot price on Monday, April 24, of € 29.20.
There were further, less severe fluctuations of price until the complete data were released
on May 15; however, the essential adjustment was made in these four days and after May
2 The next year’s allocation is distributed to installations two months prior to the date when allowances must be surrendered for the past calendar year. Since EUAs distributed within the trial period are completely interchangeable, installations have the option of borrowing from the next year’s allocation to cover a shortage in the just completed year. This option does not apply at the end of 2007 since first period allowances are not interchangeable with second period (2008-12) allowances.
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15 the spot price remained close to € 15 until late September when first period allowances
began what would be a steady fall to a near zero price in early 2007.
<INSERT FIGURE 1>
The April 2006 price “collapse” demonstrated a readily observable characteristic of
markets: They adjust quickly when information that changes expectations is made
available. And there should be no doubt that the first release of reliable information
concerning emissions covered by a cap-and-trade program affects expectations. The cap is
always known, but until aggregate emission data is released no one has a really good idea
of what aggregate emissions are and of the resulting demand for allowances. The same
phenomenon was observed in the US SO2 emissions trading program when the first auction
revealed emissions and the implied demand for allowances to be much less than expected
(Ellerman et al. 2000). In the case of the EU ETS, a similar adjustment of expectations
concerning CO2 emissions and the implied demand for EUAs occurred in response to the
release of these data. Anyone doubting the adjustment in expectations need only refer to the
headline of the guest editorial in Point Carbon’s April 21 edition of Carbon Market
Europe— “CO2 price still too low”—and note the absence of such articles since April 2006
(at least as concerns first period prices). While the obvious explanation of the price break
in late April 2006 is an adjustment of expectations, EUA prices did not go to zero
immediately. Moreover, first period prices did reach zero until a year later as it became
iincreasingly clear that weather and other factors would not create additional demand
before the end of the period. Finally, it bears noting that the second release of verified
emissions in April 2007 had no effect on either first or second period EUA prices.
Expectations were calibrated and nothing new was revealed.
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3 Do the 2005-06 data reveal over-allocation?
3.1 A working definition of over-allocation
Over-allocation is not a well defined concept. The choice of words implies that too many
allowances were created, but the standard by which “too many” is to be determined is
rarely stated. Moreover, over-allocation tends to be conflated with being long, that is,
having more allowances than emissions. Since any market presumes buyers and sellers and
the former will be short and the latter long in an allowance trading system, it cannot be the
case that everyone is short. Making sense of over-allocation requires both a standard of
reference and some understanding of the reasons that some installations are short and others
long.
Two standards of reference can be imagined. The first is what emissions would have
been without the trading system, what can be called the counterfactual, and is termed BAU
(for Business as Usual) emissions in modeling exercises. Probably all would agree that
handing out more allowances than BAU emissions would constitute over-allocation. A
second standard could be a cap that is constraining, that is, less than the counterfactual, but
still judged not sufficiently ambitious. For instance, if the desired degree of ambition were a
5% reduction of emissions from the counterfactual, and allowances were distributed such as
to require only a 2% reduction, the 3% difference might be considered over-allocation.
While this second definition is plausible and seemingly the one intended in much of the
current debate, we argue that it would be better to reserve the term “over-allocation” for the
first definition to which all can agree.
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Installations, or any aggregation of installations, such as a sector, member state, or even
the system as a whole, can be long or short for a number of reasons other than “over-
allocation.” One of the most obvious is the very incentive that motivates trading,
differences in the marginal cost of abatement. For any given allocation, those installations
with lower cost of abatement would be expected to reduce emissions in order to free up
allowances to sell to installations that face higher costs of abatement. Such desired behavior
would show up in reported installation data as data points that are both long and short
according to the marginal cost of abatement at the covered installations.
A second reason for the appearance of a long position is uncertainty, the fact that the
future rarely conforms exactly to what is expected, much less to any given allocation of
tradable permits, even when expected abatement is taken into account. Over any given
period of time, it is inevitable that some installations will produce more than expected and
others less. The consequences in an emissions trading system are that the former will be
short and the latter long. It ought not to be argued that the installations that are long because
they produced less than expected, and therefore had lower emissions, were over-allocated,
unless one is prepared to argue that short installations were “under-allocated.” Given
uncertainty, the only way to overcome such over- and under-allocation would be to adjust
allowances ex post. But this would remove some of the incentive to abate.
The effects of uncertainty are not limited to installations; they can extend to aggregates.
To the extent that economic activity, weather or any other factor affecting emissions
deviates from what is expected, aggregate counterfactual emissions will be higher or lower
than expected and any given cap will be more or less constraining with consequent effects
on the positions of the components. .
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3.2 Presentation of the 2005-06 data
With these considerations in mind, it is useful to look at the short and long positions at
the installation level for various aggregates. Figures 2 and 3 do this for the EU as a whole
and for the constituent member states both in absolute terms as the annual average for
2005-06 and relative to the average allocation for the indicated aggregate. In both of these
figures, the data labeled “gross long” and “gross short” present the sum of the differences
for all the installations having long and short positions. Each aggregate then has either a
“net long” or a “net short” position indicated by the darker shade and equal to the
difference between the “gross long” and “gross short” data points for that aggregate.
<INSERT FIGURE 2>
<INSERT FIGURE 3>
Figure 2, where the differences are expressed as percentages of the total allocation to
installations constituting the aggregate, is the more instructive display of the information
for the purposes of developing some measure of over-allocation. Lithuania can serve as an
example of evident over-allocation. Only eleven installations were short and the difference
between total emissions and total allowances allocated to installations was about 45% of
the average annual allocation. While over-allocation seems evident, figuring out how much
is not obvious since it is possible that the levels of economic activity in Lithuania were not
what were expected, that Lithuanian installations may have abated, or that some other
factor may explain some or all of the long position.
At the other extreme is the UK where installations were both long and short, but the
magnitude of the deficit for short installations (28% of the UK allocation) was much greater
than the corresponding figure for installations that were long (7%). Clearly, the UK as a
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whole cannot be considered to have been over-allocated even if some firms and sectors may
be long. Also, the short position may be created, not so much by intention, but by higher
levels of economic activity than expected or other unexpected events, such as high natural
gas prices, which caused coal-fired power plants to be more heavily utilized than expected
and thereby created a larger number of short positions.
Having set up two polar cases, Figure 2 illustrates the great diversity among the EU
member states. As indicated by the top bar, the situation of the EU as a whole is balanced
with the sum of shorts being about 10% and the sum of longs about 13% for an over-all net
long position of about 3%. The same cannot be said for all the member states, which fall
roughly into four categories. The first includes those like Lithuania where all or nearly all
the installations are long and by an amount that is greater than 15% of the average annual
allocation. This group comprises the first seven member states from the top in Figure 2.
The next four member states,, Hungary, Sweden, Poland and Finland, constitute a second
group that are similar in having significant net long positions, between 10% and 15% of the
allowance allocation, but with more short installations, especially in Sweden. The third
group consists of the next eight member states—the Netherlands, Belgium, Denmark,
Cyprus, Portugal, Germany, Slovenia, and Greece—that are long on balance but by
relatively modest amounts that would fall well within what might be expected as a result of
a relative advantage in abatement or less favorable economic, meteorological, or other
circumstances in 2005-06. The final group includes the five member states who were on
balance short: Austria, Spain, Italy, Ireland, and the UK.
While Figure 2 is the more helpful of these two diagrams for evaluating the presence of
over-allocation, Figure 3 is necessary to put the phenomenon in perspective and it provides
a good picture of the main sources of demand and potential supply of EUAs. The gross
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shorts, totaling 204 million EUAs as an annual average are located mostly (76%) in four
countries: the UK, Spain, Italy, and Germany. The same four countries, plus France and
Poland, constitute the largest part of the potential sellers’ side of the market with 162
million of the 263 million EUAs were surplus to requirements to cover emissions at many
installations in 2005 and 2005, or about 62% of the total. Many of the trades implied by
these long and short positions were undoubtedly within the same countries, but there were
also net transfers of EUAs among member states.
The net positions displayed in Figures 2 and 3 imply transfers of allowances among
member states although borrowing from the next year’s allocation would also be a
possibility for these two years.3 The net balances imply that 56% of the demand for
international trading came from the UK with another 22% from Italy, 17% from Spain and
the remaining 5% from Ireland and Austria. The potential suppliers were more evenly
distributed with Poland, France, Germany, and the Czech Republic accounting for 64% of
the total.
Member states are not the only aggregates into which the installation data can be
aggregated. Another break-out is by economic sector, as is done in Figures 4 and 5 for the
2005 data only.4 By this grouping, the power sector is in the aggregate modestly short (by
about 3%), while all the other sectors are long by more significant percentages. Among
these industrial sectors, three—ceramics, bricks and tile; iron, steel and coke; and pulp and
paper—are long by more than 15% of the allocation to these sectors. When placed in the
3 For instance, an analysis done for the Italian registry found that 18% of the short positions in Italy in 2005 were covered by borrowing from the 2006 allocation (Point Carbon, 2006b). 4 The CITL data does not distinguish between power generation and combustion facilities that are in sectors outside of the power sector. Distinguishing these two requires a separation of installations into these two sub-categories. We are in the process of making this further sub-sector categorization for the combined 2005-06 data that is presented elsewhere in this paper. In its absence, we use the sector data for 2005 based on the sub-categorization performed by Kettner et al. (2007) for Figures 4, 5, and 6. We believe that the patterns revealed by the 2005 data were largely unchanged in 2006.
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perspective of the volume of emissions, as in Figure 5, the power sector dominates the
potential market. Virtually all of the compliance demand for EUAs in 2005 came from the
power sector, as well as about half of the total potential supply.
<INSERT FIGURE 4>
<INSERT FIGURE 5>
When sector and regional classifications are combined, an even clearer picture of the
implied redistribution of allowances is obtained. In Figure 6, the sectors are grouped into
power and heat and all others (generically industry) and aggregated into regions defined as
the EU 15 and the 8 East European accession states. The power and heat sector in the EU15
is the only player in the EU ETS that has been characterized by an overall net short
position. More than half of the net length is located in Eastern Europe, although given the
delay in establishing the registries in Eastern Europe, most of the net short position of the
EU15 power and heat sector in 2005 was probably covered by purchases from the EU15
industrial sectors.
<INSERT FIGURE 6>
3.3 A measure of over-allocation
A measure of the likelihood of over-allocation can be calculated from this data based on
the earlier discussion of what might cause long positions. Any aggregate of installation data
will typically show the group to be either long or short on balance and to have some
installations long and others short. For each, a ratio can be calculated from the net position
in relation to the corresponding long or short position, such as indicated below.
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ShortorLongGrossShortorLongNetRatioNet =
The ratio is assigned a negative sign if the net ratio is short and a positive sign if the net
ratio is long. To take our earlier examples, Lithuania would have a ratio of +0.98 since it
was long and its net long position is almost the same as its gross long position. Conversely,
the UK has a ratio of -0.73 since its net short position is 73% of the sum of all short
installations in the UK. By definition, the net ratio is limited to values between -1.0 and
+1.0 .
A negative net ratio indicates that no obvious over-allocation has taken place. Sectors
within a member state may be over-allocated, but if the member state as a whole is not, the
over-allocation to one sector is compensated by an implied under-allocation to other
sectors. While such differentiation may create problems for sectors that compete across
national boundaries, this differentiation can be regarded as an internal matter not
significantly different from other forms of assistance or regulatory treatment that may
advantage or disadvantage a sector relative to competitors in other countries.
Member states that have positive ratios would need to be divided into two groups
depending on where the line is drawn for indicating over-allocation. The first sub-group
would be those with a high positive ratio indicating that few installations were short. The
second group includes those with a net ratio that is positive but not excessive. There is no a
priori answer concerning where to draw the line between these two groups, but the data
clusters in a manner that allows some to be clearly assigned to one group or the other.
Figure 7 represents the distribution of allowances by member states expressed as a
percentage of the EU25 allocation according to their net ratios. The part of the columns
labeled “base” represents emissions that were covered by allocated allowances. The dark
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parts at the top of the columns labeled “purchase” indicate emissions that were greater that
the allocation for those member states with a net ratio from -1.0 to zero. The darker parts of
the columns labeled “for sale” indicate allocated allowances in excess of emissions for
those countries with a net ratio between 0 and +1.
<INSERT FIGURE 7>
The UK and Ireland, representing about 11 % of the overall EU25 allocation, are the two
countries characterized by the shortest positions with a net short that is approximately 2%
of all the EUAs issued by the EU25. The next three countries – Spain, Italy, and Austria –
account for about 20% of total EUAs and they are all short but less so than the UK and
Ireland. On the side of the longs, Greece has a relatively balanced position not unlike that
of Austria on the short side of the ledger. Germany’s size will cause the category in which
it falls to dominate all the others and so it is for the group with net ratios between +0.2 and
+0.4, which constitutes 29% of the total allocation. The last two groups, with net ratios
higher than +0.6 include the member states for which the evidence of over-allocation is
much stronger. They constitute about 30% of the EU25 total and their combined surplus is
about 6% of the total allocation.
Where to place the threshold that would create a presumption of over-allocation is
obviously a difficult decision. It should be drawn at a relatively high net positive ratio for
the reasons explained earlier and even then other factors should be considered before
coming to a definitive conclusion. The important point arising from the 2005-06 data is not
that there were some member states for which over-allocation is indicated, but that there
were so many for which that was not the case. Even with a relatively low presumptive
threshold for over-allocation of +0.60, fourteen member states that distributed 72% of all
EUAs cannot be viewed as involving over-allocation. And for the 28% remaining, about
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24% of the allowances were required to cover emissions in 2005 so that the maximum
over-allocation is on the order of 6% or 125 million EUAs, assuming that none of the
length observed in these countries can be attributed to abatement or unexpected transient
conditions that created length in these years.
Whatever the correct magnitude of this estimate, it needs to be placed in context. First
and as noted earlier, the CITL data do not present a complete indicator of the over-all
length of the EU ETS for these years. It does not include many of the allowances in
reserves for new entrants, auctions, or other purposes that may have been distributed by the
end of 2006 but do not yet show up in the CITL allocation data. While these reserves are
not specifically reserved for any single year, most of them will become available before the
end of 2007. About 255 million EUAs have been reserved for new entrants, auctions, and
other purposes and most of these reserves will be distributed by the end of 2007. If
distributed evenly over the three years of the trial period, they add another 85 million EUAs
annually . A second observation concerns the over-allocation that was avoided by the cuts
that the Commission required from a number of first period NAPs. These totaled 290
million EUAs, approximately equal on an annual average to the potential over-allocation
indicated by an analysis of these data. Finally, over-allocation indicates very little about
abatement or the reduction of emissions that is the fundamental object of the EU ETS. We
now turn to this second part of the question that we pose in the title to this paper.
4 Has the EU ETS reduced CO2 emissions?
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4.1 Some initial considerations
Just as being long or short is a difference between emissions and allocation, so abatement
is a difference between emissions and the counterfactual, or what CO2 emissions would
have been in the absence of the EU ETS.5 And, while the first difference can be readily
deduced from two observable data points, the second difference can never be determined
with certainty because the counterfactual is not observed and never will be. It can only be
estimated, but there are better and worse estimates and much can be done to narrow the
range of uncertainty, particularly when the evaluation is done ex post when the levels of
economic activity, weather, energy prices and other factors affecting the demand for
allowances are known.
In the case of the EU ETS, forming a good estimate of the counterfactual is complicated
by the lack of historical data corresponding to the installations included in the scheme.
Reasonably good data exist for the CO2 emissions of the EU member states, however the
EU ETS includes only a part—ranging from 30% to 70%—of each member state’s
emissions. And, prior to the start of the EU ETS, there was no reason to collect or to
publish data on sectors or installations that were to constitute the EU ETS.
One not entirely satisfactory source for of the data for these installations is that collected
to establish an historical “baseline.” All the member states collected recent emissions data
in the process of developing the first set of National Allocation Plans during 2004 in order
5 By the absence of the EU ETS, we intend both the trial and 2008-12 periods. What alternative policy might be assumed to be part of the counterfactual is always a difficult conceptual problem. In this case, we assume that the Kyoto Protocol is part of the counterfactual and that other measures that would affect emissions in 2005-06, such as the Renewable Directive, remain in effect. This counterfactual exercise attempts to isolate the effect of the EU ETS as a policy instrument and to determine whether it has had any effect on emissions in 2005-06. Also, we do not assume that aspirational goals trigger responses absent more substantive and specific mandates or incentives.
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to establish an initial point for projecting what emissions were expected to be in 2005-07
for the trading sector as a whole, for specific industrial sectors, and for individual
installations. While this data source provides a much needed reference point, it suffers from
two problems: potential bias and imperfect comparability.
The potential bias in the data arises from the process by which the data were collected.
As described in Ellerman, Buchner and Carraro (2007), the data collection effort was
largely a voluntary submission by the industries involved and it was conducted under
severe time pressures that did not allow for as much verification as could be desired.
Cooperation in submitting the data is reported as good, perhaps not surprisingly since
allowance allocations would depend on the data submitted; but for that reason there was
also an incentive to resolve uncertainties in favor of higher emissions.
While an incentive to inflate emissions clearly existed, its role should not be exaggerated.
The government officials cross-checked the data submitted with other information that was
often available, as well as checking it for internal consistency. Also, a certain degree of
internal discipline could be expected within the process from firms who would not be
indifferent to inflated claims by competitors. The important point is not that these data
should be accepted as is, or rejected out-of-hand, but that the extent of bias be measured or
at least taken into account. It would be wonderful if there were other more reliable data that
could be used, but in its absence, the baseline data are all that exist to enable an estimate of
the extent to which the EU ETS reduced CO2 emissions.
The second problem with the baseline data is that the components to be summed across
the EU are not fully comparable. Although all member states sought a measure of recent
emissions in developing their baselines, the definitions varied. For all, it was an average of
recent years ending with 2003, the last year for which data were available, but the years
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included in the average varied from two to six. Moreover, special provisions were
sometimes adopted that let minimum observations be dropped, as in the UK, or for more
recent 2004 data to be used instead of the historical average, as in the Czech Republic.
Nevertheless, there are presently no other data and the historical baseline data have the
merit of reflecting relatively recent years (e.g. around 2001-2003) for the installations in the
EU ETS. As with the problem of bias, the solution is not to throw out the baseline data but
to understand and to measure the errors that may be created by incomplete comparability.
4.2 Verified emissions compared to baseline emissions
With these significant qualifications in mind, we now present the historical baseline data
in comparison with corresponding data on allowances and verified emissions. Historical
emissions must not be thought of as the counterfactual for 2005-06; it is the starting point
before taking account of changes that would have occurred between the historical reference
point and the year of the counterfactual, as we will do in the next section. Figure 8 presents
the historical baseline and the average annual allocations and verified emissions for the EU
member states summed into a whole for the EU23 and for the regional distinction between
the EU15 and the 8 East European accession states (subsequently EE8).
<INSERT FIGURE 8>
For the EU23, verified emissions are 3.1% less than baseline emissions and the
corresponding percentages for the EU15 and the EE8 are -2.0% and -7.7%. In these three
aggregated comparisons, the solid part of the middle column represents allowances
distributed directly to installations. The hatched area at the top of each column indicates the
difference between the number of allowances distributed annually to installations in 2005
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and one-third of the cumulative three-year total for each member state as indicated in the
NAPs. These are allowances that have been reserved for auctions, new entrant or early
action reserves, or other special provisions.
4.3 Changes in real output and carbon intensity since 2002
The comparison of verified emissions with the baseline in the preceding section does not
take account of factors that would influence the level of CO2 emissions between 2002 and
2005-06. 6 Continuing GDP growth, or more specifically growth in the output of the sectors
included in the EU ETS, would be expected to causes emissions to increase and for the
counterfactual to be higher than the historical baseline. Also, CO2 emissions typically do
not grow at the same rate as real output because of the observed tendency towards
improved carbon intensity for most economies. In addition to these trend factors, there are a
number of unpredictable conditions, such as the weather and energy prices, that will
increase or decrease counterfactual emissions and the demand for allowances depending on
their realization relative to the expectation.
Economic growth since 2002 has been relatively robust in the EU and particularly in the
East European accession states as shown in Figure 9 by the indices describing the
cumulative growth in GDP measured in constant prices in relation to the year 2002. For the
EU as a whole, GDP has grown by almost 6 percent by 2005 compared to 2002 and by 9
percent by 2006. The figure is slightly lower for the EU15 where most of the economic
activity occurs and significantly higher for the Eastern European countries +15% and +22%
for 2005 and 2006, respectively). 6 We use 2002 as an approximate center point for the baseline emissions.
Forthcoming in Environmental and Resource Economics
19
<INSERT FIGURE 9>
GDP reflects a broader definition of economic activity than what is included in the EU
ETS, but the same pattern obtains when more sector–specific indices of economic activity
are used, as shown by Figure 10.
<INSERT FIGURE 10>
These indices shown monthly activity since the beginning of 2002 through 2007 and each
series is normalized to its average value in 2002. All of these indices indicate higher levels
of real output in 2005-06 than in 2002. The two most important series, electricity and
industrial output excluding construction are both about 6% above the average 2002 level of
output when measured as the average 2005-06 level of activity. More specific industrial
sector indices show increases of about 8% for cement, 6% for pulp and paper, 5% for iron
and steel, and 4% for glass, bricks, tiles, and ceramics. Temporary declines in output of iron
and steel and of pulp and paper can be observed in 2005, but these were temporary and the
average output levels observed in 2006 are higher for all sectors than in 2005, although
electricity production declined as the year progressed.
Since CO2 emissions typically do not increase at the same rate as broad indicators of
economic activity, some estimate of the improvement in CO2 intensity must be taken into
account in estimating a counterfactual for 2005-06. Because of the paucity of industry-
specific data on carbon intensity, we examine first the trends in carbon intensity for the
economy as a whole for the EU and its constituent parts and then consider whether the
economy-wide data can be considered representative of the EU ETS sectors based on the
sector specific data that is available.
Table 2 provides a comparison of the annual rates of growth for real GDP, CO2
emissions, and the implied change in CO2 intensity between 1995-2000 and 2000-2004 for
Forthcoming in Environmental and Resource Economics
20
the EU23, the EU15 and the EE8. Real GDP growth has been less in recent years than in
the last half of the 1990s but the recent rate of increase in CO2 emissions has been greater
than in the earlier period. The inescapable implication is that the rate in improvement in
CO2 intensity slowed noticeably around 2000. These trends are especially pronounced in
the EU15, but they are also true for the new East European member states. CO2 intensity is
still improving, but the rate of improvement has diminished sufficiently that CO2 emissions
are increasing at a faster rate than they were in the late 1990s despite slower growth in real
GDP.
<INSERT TABLE 2>
This slowing in the rate of decline in CO2 intensity since 2000 raises an obvious problem
with extrapolating the declines in carbon and energy intensity experienced during the 1990s
beyond 2000. For the purpose of establishing a counterfactual for 2005-06, we assume that
the trend prevailing since 2000 is the appropriate one. GDP and economy-wide CO2
emissions data are now available through 2005. Real GDP grew at 1.95% between 2004
and 2005 for the EU as a whole, but EU economy-wide CO2 emissions decreased from
4117 to 4093 Mt CO2, or by 0.6%. If we assume that the 2000-04 trend of annual
improvement in CO2 intensity of 0.8% would have continued from 2004 through 2005 in a
counterfactual case without a CO2 price, emissions would have increased by 1.14% to 4164
Mt CO2, 71 Mt above observed EU economy- wide CO2 emissions.
This very rough counterfactual calculation implicitly assumes that energy prices
remained unchanged between 2004 and 2005. In fact, energy prices increased in 2005 and
the prices of oil and natural gas by considerably more than the price of coal. The effect of a
general increase of energy prices relative to other goods would be to increase the rate of
improvement in CO2 intensity and to diminish emissions. However, when the relative
Forthcoming in Environmental and Resource Economics
21
prices of oil and natural gas rise relative to the price of coal, and where coal- and gas-fired
electricity generation accounts for a significant share of emissions, the effect would be the
opposite. How the two contending effects worked out after 2004 is a good question, but
with nearly 50% of the emissions in the EU ETS from fossil-fuel-fired electricity
generation and given the ease of switching from coal to natural gas and oil, or back, the
short-term effect is likely to have dominated in 2005-06 and caused counterfactual
emissions to be higher in 2005 than the figure given above. Thus, the highly tentative
estimate of 73 Mt CO2 provided above can be considered conservative.
The critical issue with the use of economy-wide data is whether it is representative of the
sub-set of the economy that the EU ETS comprises. Eurostat publishes data on the energy
intensity of both the EU economy as a whole and the industrial sector. Examination of these
data indicates that the trends observed for energy intensity in the economy-wide aggregates
hold true for the industrial sector. The same break in trend around 2000 that is observed for
CO2 intensity per unit of GDP is seen in energy intensity for the industrial sectors and for
the economy as a whole for the EU25 and the EU15, as well as for fifteen of the twenty-
five member states. Ten member states exhibit a trend to increasing energy efficiency in
either the economy-wide or industry figures rates of change; however, when aggregated to
the EU25 or EU15 level, the data are consistent with a trend to less improvement in carbon
intensity since 2000. Moreover, the rates of improvement in energy intensity for the
industrial sectors are generally not as great for the economy as a whole and the slowdown
in improvement is more pronounced for the industrial sectors than for the economy as a
whole.
Energy intensity is not identical to emissions intensity, although it is an important
determinant; however, a second source of data on emissions at a lower level of aggregation
Forthcoming in Environmental and Resource Economics
22
than the economy as a whole helps to overcome this problem. The European Environmental
Agency has recently released its annual assessment of progress towards the Kyoto goals
(EEA, 2007), which provides indices of GHG emissions for industry excluding
construction through 2005. Again, GHG emissions are not the same as CO2 emissions, but
the latter constitute most of the former. These data series show the same break in emissions
trends around 2000 and rising GHG emissions between 2002 and 2004.
Based on these two sources of aggregate data that are more directly comparable to the
EU ETS sectors, we believe that it is unlikely that the trends in CO2 intensity that are
evident through 2004 for the EU economies as a whole were not also broadly true for the
EU ETS sectors. Given the observed increase in real output for the EU ETS sectors, it is
unlikely that CO2 emissions from the installations included in the scheme would have
declined in the absence of the EU ETS and the significant price that was paid for CO2
emissions in 2005.
4.4 Estimating the counterfactual and abatement
Figure 11 summarizes the problem of estimating the counterfactual and thereby
determining the amount of CO2 emission reduction that was effected by the EU ETS in the
first two years of the program. There are two data points: the imperfect baseline emissions,
which we take to reflect approximately 2002 emissions of the EU ETS installations, and
verified emissions in 2005 and 2006. The critical issue is: What would have been the rate of
change in BAU emissions in the absence of the EU ETS?
Real GDP and the relevant sector-specific indicators of economic activity indicate annual
growth of about 2% for the EU as a whole. While the decline in carbon intensity since 2000
Forthcoming in Environmental and Resource Economics
23
has been significantly less than what was experienced in the 1990s, it has not stopped so
that 2% annual growth in counterfactual CO2 emissions would be too high, except that
higher natural gas prices in 2005 would have increased emissions and the demand for
EUAs. Given the changes in relative energy prices, we take 2% as an upper limit for the
growth in counterfactual emissions. Similiarly, the growth in real GDP and the post-2000
trend in CO2 intensity make it unlikely that the lower limit on the feasible growth of BAU
emissions would be less than one percent. Accordingly, it appears likely that counterfactual
emissions increased to a level that in 2005-06 would have been from 3% to 6% higher in
2005 and 4% to 8% higher in 2006 than the level of emissions for the EU ETS installations
in 2002. The two arrows in Figure 12 represent these two limiting assumptions about the
growth of CO2 emissions absent the EU ETS, given what we can now observe concerning
the growth in real output in the EU ETS sectors, the post-2000 trend in CO2 intensity, and
the evolution of CO2 emissions through 2004.
<INSERT FIGURE 11>
Assuming for the moment that the baseline emissions accurately reflect 2002 emissions
for the EU ETS installations, these limiting assumptions imply that the counterfactual lies
between 2.14 and 2.21 billion tonnes of CO2 in 2005 and 2.17 and 2.25 billion tons in 2006.
Since verified emissions are 2.01 and 2.03 billion tonnes in these two years, these figures
suggest a reduction of CO2 emissions between approximately 130 and 200 million tonnes in
2005 and between approximately 140 and 220 million tonnes in 2006, or 7% to 8% of what
emissions would otherwise have been.
However, the assumption of an accurate baseline is open to serious challenge because of
the less than ideal conditions under which the baseline data on installation level emissions
were collected. These conditions undoubtedly produced errors, but errors operate in both
Forthcoming in Environmental and Resource Economics
24
directions. The more serious concern in estimating a counterfactual is the likelihood of bias,
which would imply that the errors are disproportionately and systematically in one
direction. To the best of our knowledge, no one has done the empirical work to prove the
bias or to develop a better estimate of the level of historical emissions for the EU ETS
installations prior to 2005 or of counterfactual emissions in 2005 and 2006. In any case, the
critical issue is: What is the magnitude of bias? Or to turn the question around: How much
bias would required to support a conclusion of no abatement of CO2 emissions by EU ETS
installations in 2005 and 2006?
The best way of addressing this question would be to take a country-specific approach to
estimating counterfactual emissions, but a clear distinction can be made between the new
accession countries of Eastern Europe and the EU 15. For the former, historical data were
of poor quality and of questionable relevance given the ongoing rapid structural change in
those economies. Generally, these conditions do not exist among the EU15 or nearly to the
same degree. Accordingly, it is plausible that more bias exists in the baselines of the East
European states than in those of the EU15.
To develop an initial counterfactual point estimate that does not take the potential bias in
baseline emissions into account, we assume that CO2 emissions in the EU ETS sectors
increased at an annual rate that is the product of the annual increase in observed real GDP
between 2002 and 2005 and the rate of decline in CO2 intensity that was experienced
between 2000 and 2004 for each country. That calculation and the resulting data are
summarized in the first panel of Table 3.
<INSERT TABLE 3>
The indicated growth in counterfactual emissions for the EU15 and EE8 between 2002
and 2005 is 3.1% and 4.8%, respectively, or 3.5% for the EU as a whole. The indicated
Forthcoming in Environmental and Resource Economics
25
abatement is about 174 million tonnes or 8% with percentage reductions of 7% for the
EU15 and 12.8% for the eight East European member states.
Not only is this amount considerably larger than what is indicated based on reported
economy-wide GDP and emissions data, but the greater proportionate reduction in the East
than in the West seems unlikely. There probably was some abatement in the East, and no
doubt cheaper abatement opportunities exist there than in the EU15; but firms in Eastern
Europe are less attuned to market opportunities than those in the EU15; and, if they are,
they would have been impeded from trading by the delays in final approvals of several
NAPs and in setting up the East European registries.
A more likely explanation for the result shown in the first panel of Table 3 is that the
baseline emissions for the East European countries contain more bias than those of the
EU15. Accordingly, the second panel repeats the same calculation concerning growth of
emissions that was made in the first panel but from baselines that have been lowered by
percentages that would be required to sustain a conclusion of effectively no abatement in
the EU15 and EE8. The implied adjustments are 7% for EU15 countries and 11 % for the
eight new accession members. Both of these seem unlikely as estimates of cumulative,
systemic bias, although undoubtedly errors of this magnitude will exist in the data for
individual installations or small sub-sets.
Until better estimates based on more detailed country- and sector-specific research have
been done, it is not possible to make a reliable estimate of abatement. Nevertheless, it is
unlikely that there was no abatement in 2005. Such a conclusion is also sustained by
research now appearing (Delarue, Voorspools and D’haeseleer, 2007), which finds
abatement of 88 Mt and 59Mt in 2005 and 2006 respectively in the power sector alone from
Forthcoming in Environmental and Resource Economics
26
fuel switching based on a counterfactual simulation of the EU electricity systems using
actual fuel prices and observed demand in these years.
The calculations presented in Table 3 indicate an amount that is certainly lower than 170
Mt CO2 by however much is the bias in the baseline emissions data. An amount half this
much—abatement of 85 million tons or about 4%—seems not unreasonable given the
independent economy-wide data, but it is arbitrary and must remain so until better data and
more careful assessments can be made.
In the meantime, the refutable presumption must be that the EU ETS succeeded in
abating CO2 emissions in its first two years based on three observations.
1. A Significantly Positive EUA Price. A significant price was paid
for CO2 in 2005-06, which would have the effect of reducing
emissions as firms adjust to this new economic reality.
2. Rising Real Output. Real output in the EU has been rising at the
same time that the rate of improvement in CO2 intensity has been
declining, which has led to rising CO2 emissions before 2005.
3. Historical Emissions Data that indicate a reduction of emissions
even after allowing for plausible bias.
The amount of emission reduction in 2005 and 2006 may be modest, but so is the
ambition of the 1st period cap. Given the problems of getting the system started and the
changes in management and regulatory practice implied, even a modest amount of
abatement may seem surprising, but the available evidence makes it hard to argue that there
was none.
Forthcoming in Environmental and Resource Economics
27
5 Concluding comments
The question posed in the title to this paper is whether the 2005-06 emissions data reveal
over-allocation or abatement. Any reasonable answer to this question will acknowledge that
both have occurred and this paper has attempted to develop estimates of the magnitude of
both.7
Over-allocation has the unfortunate attribute of depending on the eye of the beholder,
especially when viewed ex post. Nevertheless, there are plausible, empirical measures that
can be developed. The one that we suggest is the ratio of an aggregate’s net long (short)
position to the sum of the long (short) positions of that aggregate’s components. When
some sizeable aggregate is long on balance and this ratio is close to unity, the likelihood of
over-allocation is high. As we have noted, there are circumstances that would produce a
high ratio without over-allocation, so that the presumption of over-allocation can be refuted
if such circumstance can be convincingly shown. It is also possible that the over-allocation
was intentional, as was arguably the case for the industrial sectors included in the EU ETS,
in which case the attribute is the reflection of some equity consideration. Our analysis
based on the application of the net ratio indicates that over-allocation occurred and that its
magnitude may have been as much as 125 million EUAs, the volume of the surplus
allowances for those member states with net ratios in excess of +0.6%.
Whatever the extent of over-allocation, that estimate does not say much about abatement.
In a trading system, it is not the allocation to an installation that causes a firm to reduce
emissions, but the price that it must pay, even if in opportunity cost, for its emissions.
7 The observation that unexpectedly the long position of the EU ETS in 2005 was due to some combination of over-allocation and abatement was presciently made as early as May 2006, but little noted in the ensuing focus on over-allocation (Voorspools, 2006).
Forthcoming in Environmental and Resource Economics
28
Whatever one thinks of the allocation in the first period, there can be no doubt that a price
was paid and a cost incurred for CO2 emissions emitted by covered installations in 2005.
Therefore, the question can be posed: What was the effect of this price? The data to answer
this question are not nearly as good as they should be, but our analysis of what is available
indicates that CO2 emissions were reduced by an amount that was probably between 50 and
100 million tonnes in each of these years.
These very tentative estimates of over-allocation and abatement have important
implications. If abatement was at least 50 million tonnes annually, only a relatively small
proportion of the observed long position of nearly 60 million tonnes for the EU as a whole
in 2005-06 can be attributed to over-allocation. To the extent that there has been over-
allocation and that those EUAs have found their way to the market, the clear implication is
only that EUA prices (and abatement) are lower than they would otherwise have been.
This reasoning raises the interesting question of what was the source of the surprise that
caused EUA prices to drop so sharply when the 2005 emissions data were revealed in April
and May of 2006. It cannot have been the total number of allowances; this total had been
known since at least mid-2005 when the last first period NAP was approved. Moreover,
that total included whatever “over-allocation” had occurred and all observers recognized
that the first period EU ETS cap was not very demanding. The surprise in late April 2006
concerned the revealed level of emissions. One plausible explanation is that market
observers had over-estimated the level of CO2 emissions and the consequent demand for
allowances because of rising real output, the adverse weather in 2005, and the higher prices
for natural gas relative to coal. But, another more intriguing possibility is that market
observers under-estimated the amount of abatement that would occur in the first year of the
EU ETS as the managers of affected facilities incorporated CO2 prices into their production
Forthcoming in Environmental and Resource Economics
29
decisions. When revealed to be wrong, an under-estimate of abatement would have the
same effect on EUA prices as an over-estimate of counterfactual emissions.
Our analysis suggests that such an under-estimate is a distinct possibility. Moreover,
experience with emissions trading regimes in the U.S. has shown that unexpected
abatement always occurs. And it is unexpected because abatement is so often conceived as
resulting only from large machines that engineers can design and regulators mandate and
not from the small, incremental changes in production and production processes that
managers of existing facilities make in adjusting to new economic realities. These
pedestrian changes can cumulatively make a perceptible difference and they are one of the
main reasons for choosing market-based instruments, such as the EU ETS.
Acknowledgements
We are greatly endebted to continuing discussions with a number of observers and
analysts of the EU ETS, to comments received in response to a presentation of earlier
versions of this paper at various fora, and the very helpful comments of the two referees.
We also acknowledge our debt to Angela Koeppl from the Austrian Institute of Economic
Research (WIFO) in Vienna and to Stefan Schleicher from the Wegener Center for Climate
and Global Change at the University of Graz whose initial compilation of the Community
Independent Transaction Log (CITL) data showed what could be done with this valuable
data base. The usual disclaimer applies to the responsibility of all who have helped us for
the interpretations of the data that we present here.
Forthcoming in Environmental and Resource Economics
References
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Eurostat (2006) Statistical data on monthly production index, on monthly data of industry
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Forthcoming in Environmental and Resource Economics
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Office of the European Communities, Brussels. http://epp.eurostat.ec.europa.eu/ Cited
31 October 2007
German Emissions Trading Authority (DEHSt, 2005) Implementation of emissions trading
in the EU: National Allocation Plans of all EU States. Prepared in cooperation with the
Fraunhofer Institute for Systems and Innovation Research and the Öko-Institut, Berlin.
International Monetary Fund (IMF) (2006) World economic outlook database, Washington
D.C. http://www.imf.org/external/data.htm Cited 15 September 2006
Kettner, C, Koeppl, A, Schleicher, S P, Thenius, G (2007) EU Emissions Trading Scheme:
The 2005 evidence. Working Paper 22.2007, Fondazione Eni Enrico Mattei, Milan.
Point Carbon (2006 a) CO2 prices still too low, Carbon Market Europe, 21 April 2006.
Point Carbon (2006 b) Italian companies covered 18 per cent of 2005 shortage by
borrowing, Point Carbon News, 30 October 2006.
Voorspools, K. (2006) European Emissions 2005: Uncertainties, confusion, blanks and
hope. Energy & Environmental Markets: Special Report, Fortis Bank, Energy and
Carbon Market Analysis, 15 May 2006.
Forthcoming in Environmental and Resource Economics
Figure 1. Price developments on the EU carbon market (OTC Market, November 2005 to
September 2007)
29.20
8.95
0.08
21.75
20.70
20.25 17.90
32.85
02468
10121416182022242628303234
01-1
1-20
05
21-1
1-20
05
09-1
2-20
05
30-1
2-20
05
19-0
1-20
06
08-0
2-20
06
28-0
2-20
06
20-0
3-20
06
07-0
4-20
06
02-0
5-20
06
22-0
5-20
06
09-0
6-20
06
29-0
6-20
06
19-0
7-20
06
08-0
8-20
06
28-0
8-20
06
15-0
9-20
06
05-1
0-20
06
25-1
0-20
06
14-1
1-20
06
04-1
2-20
06
22-1
2-20
06
16-0
1-20
07
05-0
2-20
07
23-0
2-20
07
15-0
3-20
07
04-0
4-20
07
26-0
4-20
07
16-0
5-20
07
05-0
6-20
07
25-0
6-20
07
13-0
7-20
07
02-0
8-20
07
22-0
8-20
07
11-0
9-20
07
Pric
e [€
/ton]
Spot 2006 2007 2008 Source: Own calculations based on data from Point Carbon.
Forthcoming in Environmental and Resource Economics
33
Figure 2. Short and long positions by member state in percent (average 2005/2006)
-30 -20 -10 0 10 20 30 40 50 60
TOTAL
LITHUANIAESTONIA
LATVIALUXEMBOURG
SLOVAKIAFRANCE
CZECH REPUBLICHUNGARY
SWEDENPOLANDFINLAND
NETHERLANDSBELGIUM
DENMARKCYPRUS
PORTUGALGERMANYSLOVENIA
GREECEAUSTRIA
SPAINITALY
IRELANDUK
PERCENT
Net Short Net Long Gross Short Gross Long
Source: CITL
Note: average of 2005 and 2006 data
Forthcoming in Environmental and Resource Economics
34
Figure 3. Short and long positions by member state in MtCO2 (average 2005/2006)
-60 -50 -40 -30 -20 -10 0 10 20 30 40 50
POLANDFRANCE
GERMANYCZECH
NETHERLANDSFINLAND
LITHUANIAESTONIA
SLOVAKIAHUNGARYBELGIUMSWEDEN
DENMARKPORTUGAL
LATVIALUXEMBOURG
GREECECYPRUS
SLOVENIAAUSTRIAIRELAND
ITALYSPAIN
UK
MTCO2
Net Short Net Long Gross Short Gross Long
Source: CITL
Note: average of 2005 and 2006 data
Forthcoming in Environmental and Resource Economics
35
-20 -10 0 10 20 30
TOTAL
Power and Heat
Refineries
Cement & Lime
Glass
Ceramics, Bricks & Tiles
Iron, Steel & Coke
Pulp & Paper
Percent
Net Short Net Long Gross Short Gross Long
Figure 4. Short and long positions by EU-wide sectors
Source: CITL and Kettner et al. (2007).
Note: 2005 data only
Forthcoming in Environmental and Resource Economics
36
-160 -120 -80 -40 0 40 80 120
Power and Heat
U/I Others
Iron, Steel & Coke
Cement & Lime
Refineries
Pulp & Paper
Glass
Ceramics, Bricks & Tiles
MtCO2
Net Short Net Long Gross Short Gross Long
Figure 5. Short and long positions by EU-wide sectors in absolute terms
Source: CITL and Kettner et al. (2007).
Note: 2005 data only
Forthcoming in Environmental and Resource Economics
37
Figure 6. A breakdown of short and long positions by major sectors and regions
-200 -150 -100 -50 0 50 100 150
EE8 Industry
EE8 Power&Heat
EU15 Industry
EU15 Power&Heat
MEUAs
Net Short Gross Short Net Long Gross Long
LONGSHORT
Forthcoming in Environmental and Resource Economics
38
Figure 7. Distribution of EUAs by Net Ratio
0%
5%
10%
15%
20%
25%
30%
35%
-1 to -.8 -.8 to -.6 -.6 to -.4 -.4 to -.2 -.2 to 0 0 to .2 .2 to .4 .4 to .6 .6 to .85 .85 to 1.0
% o
f EU
25 A
lloca
tion
Base Purchase "Sold"
Spain
Greece
SloveniaBelgiumDenmarkGermany
Sweden Cyprus
NetherlandsPortugal
FinlandHungary
FrancePolandBaltics
SlovakiaCzech Rep
Luxembourg
UKIreland
Italy
Austria
Note: average of 2005 and 2006 data
Forthcoming in Environmental and Resource Economics
39
Figure 8. 2005/6 emissions, base period emissions and total allowances: total and by
region
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
Baseline EU-23
Allowances EU-23
Emissions EU-23
Baseline EU-15
Allowances EU-15
Emissions EU-15
Baseline EU-8
Allowances EU-8
Emissions EU-8
Mill
ion
met
ric to
ns C
O2
- 3.1%
- 2.0%
- 7.7%
Forthcoming in Environmental and Resource Economics
40
Figure 9. GDP growth in the European Union
95
100
105
110
115
120
125
2002 2003 2004 2005 2006
100
= 20
02 EU 23
EE 8
EU 15
Source: Own calculations based on IMF data.
Forthcoming in Environmental and Resource Economics
41
Figure 10. Indicators of economic activity in the EU25 (2002-2006)
94
96
98
100
102
104
106
108
110
112
114
116
Volu
me
inde
x of
pro
duct
ion;
av
erag
e 20
02=1
00
Pulp & paper Glass, bricks, tiles, ceramicsCement Iron & steelTotal industry (excluding construction) Production and distribution of electricity
2005 2006
Forthcoming in Environmental and Resource Economics
42
Figure 11. A scenario for BAU emissions in the absence of the EU ETS
0
500
1,000
1,500
2,000
2,500
Historic (2002) 2005 2006
Mt C
O2
+1.0% p.a.
EU ETSBaseline
Emissions
VerifiedEmissions
2005
BAU Emission Growth?
+2.0% p.a.
VerifiedEmissions
2006
BAU Emission Growth?
+1.0% p.a.
+2.0% p.a.
Forthcoming in Environmental and Resource Economics
43
Table 1. A general picture of the EU ETS in its first two years
Allocation 2005/2006
Mt CO2
Emissions 2005/2006
Mt CO2 Difference
Mt CO2 Difference Percentage
TOTAL 2072.7 2014.0 58.7 2.8%
Germany 493.4 476.2 17.2 3.5% Poland 237.0 205.7 31.2 13.2% Italy 210.1 226.6 -16.5 -7.9% UK 205.3 246.7 -41.4 -20.2% Spain 168.9 181.5 -12.7 -7.5% France 150.4 127.3 23.1 15.4% Czech Republic 96.9 83.0 13.9 14.3% Netherlands 86.4 78.5 7.9 9.1% Greece 71.1 70.6 0.5 0.6% Belgium 59.1 55.1 4.0 6.9% Finland 44.6 38.9 5.8 12.9% Portugal 36.9 34.8 2.2 5.8% Denmark 32.5 30.3 2.2 6.8% Austria 32.5 32.9 -0.3 -1.1% Slovakia 30.5 25.4 5.1 16.7% Hungary 30.2 25.9 4.2 14.0% Sweden 22.3 19.2 3.1 14.0% Ireland 18.9 22.0 -3.1 -16.6% Estonia 17.5 12.4 5.1 29.2% Lithuania 12.0 6.5 5.5 45.6% Slovenia 8.9 8.8 0.1 1.5% Cyprus 5.5 5.2 0.4 6.7% Latvia 4.1 2.9 1.2 28.7% Luxembourg 3.2 2.7 0.6 17.7%
Source: Own calculations based on data provided by the CITL.
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Table 2. Trends in Real GDP, CO2 emissions, and CO2 intensity
Annual changes in percent 1995-2000 2000-2004
Real GDP +2.9% +1.8% CO2 Emissions +0.1% +1.0% EU23 CO2 Intensity -2.7% -0.8% Real GDP +2.8% +1.6% CO2 Emissions +0.4% +1.1% EU15 CO2 Intensity -2.3% -0.5% Real GDP +4.3% +3.6% CO2 Emissions -1.8% +0.2% EE8 CO2 Intensity -5.8% -3.3%
Source: CO2 emissions from EEA (2006). Own calculations for GDP based on IMF data weighted
at 2004 PPP values. Intensity calculated.
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Table 3. A country-specific approach to calculating emission reductions
Baseline Emissions (Mt CO2)
2005 BAU Emissions (Mt CO2)
Verified Emissions (Mt CO2)
Indicated Reduction (Mt CO2)
Percent Reduction
Without adjustment of baseline emissions
EU23 2,078 2,150 (+3.5%) 1,976 -174 -8.1% EU15 1,677 1,729 (+3.1%) 1,609 -120 -7.0% EE8 401 421 (+4.8%) 367 -54 -12.8%
With adjustment of baseline emissions
EU23 1,917 (-7.8%) 1,984 (+3.5%) 1,976 -7.6 -0.4% EU15 1,559 (-7.0%) 1,614 (+3.1%) 1,609 -4.8 -0.3% EE8 357 (-11.0%) 370 (+4.8%) 367 -2.8 -0.7%
Source: Own calculations based on data from CITL, DEHSt (2005), EEA (2006) and IMF.
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